The Rental Income Shading Formula
When you receive rental income, banks do not count 100% of it in their serviceability calculation. They apply a "shade" or "haircut" to account for vacancy, maintenance, and other costs. The standard shade rate in Australia is 70–80% of gross annual rental income.
Weekly rent: $650 | Annual rental income: $33,800
At 70% shade: $33,800 × 70% = $23,660/year counted
At 80% shade: $33,800 × 80% = $27,040/year counted
Difference: $3,380/year
Borrowing power difference (at ~8% test rate): ~$42,000 more with an 80% shade lender
Actual vs Assessed Rent
Lenders use different base figures for rental income calculations:
- Some lenders use actual rent received: The amount on your lease or most recent tax return statement
- Some lenders use appraised rent: A property manager's written rental appraisal (which may be higher or lower than current rent)
- Major banks typically use the lower of actual vs appraisal: Protecting themselves from inflated appraisals
- Non-bank lenders may use the higher: Particularly if you can demonstrate current market rates
Lender Comparison Table: Rental Income Treatment
| Lender | Shade Rate | Basis | Negative Gearing Add-back | Holiday Rental |
|---|---|---|---|---|
| CBA | 80% | Actual or 75 wk market rate | No | 50% shade, 2yr history |
| ANZ | 80% | Actual from tax return | Yes (PAYG borrowers) | 50% shade, 2yr history |
| Westpac | 75% | Lower of actual or appraisal | No | Not accepted (1yr min) |
| NAB | 80% | Actual from lease or tax return | Yes | 50% shade |
| Macquarie | 80% | Market rental appraisal | Yes | Case by case |
| Non-bank lenders | 70–80% | Varies by lender | Sometimes | Often more flexible |
How Negative Gearing Add-Back Works
Some lenders recognise that negative gearing creates a tax benefit — and add this back to your effective income. Example:
Net rental loss: $12,000/year
Marginal tax rate: 37%
Tax saving: $4,440/year
Without add-back: Your income for servicing is reduced by $12,000 (the net rental loss counts as an expense)
With add-back: Your income is only reduced by $7,560 ($12,000 × 37% = $4,440 added back)
Rental Income from a New Investment Property
If you're buying a new investment property, you can include the estimated rental income even before you've received any. The lender requires:
- A rental appraisal letter from a licensed real estate agent
- The letter must be on agency letterhead and address the specific property
- Most lenders accept letters dated within 90 days of application
- The estimated rent is then shaded at the standard 70–80%
SMSF Rental Income
Rental income from properties held in a Self-Managed Super Fund (SMSF) is generally not counted in personal borrowing power calculations — because the property is a separate legal entity (the SMSF) and the income is trapped in the fund. Only a broker specialising in SMSF lending can structure applications to maximise your position.
How to Maximise Rental Income in Your Application
- Use a lender with 80% shade (not 70%) — this alone can increase borrowing power by tens of thousands
- Get current rental appraisal letters for all properties — if the current rent is below market, an appraisal may show a higher figure the lender will use
- Declare all rental income in your tax return — undeclared income cannot be counted by lenders
- Choose a lender that applies negative gearing add-back — some lenders recognise the tax benefit as effective income
- Time your application carefully — most lenders require a 12-month history of consistent rental income; a new tenancy in the month before application may not count
Frequently Asked Questions
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